Monetary and Banking Policy and Performance
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ECONOMIC REPORT AND BALANCE SHEET 1387 MONETARY AND BANKING POLICY CHAPTER 14 AND PERFORMANCE Objectives Stipulated in the 4th FYDP Key Monetary Policies Approved in 1387 he year 1387 corresponds to the In 1387, for the first time, a collection of fourth year of the 4th Five-Year CBI's monetary, credit, and supervisory guide- Development Plan in the context lines titled as "Supervisory-Policy Package of the 20-Year Vision Plan. In of the Banking System" was declared to Taccordance with the 4th FYDP Law, allocation banks and credit institutions. Key monetary of banking facilities by the government and credit policies of 1387 are: in the form of sectoral or regional, as well as priorities concerning sectors and regions Lending rate on the facilities extended shall be carried out by giving incentives to by banks for transaction contracts was set at the banking system through cash subsidies 12 percent. Lending rate on the banking and administered funds. Obligations of facilities extended to SMEs and agricultural banks to provide facilities at lower rates, in projects was set at 10 percent, and the the form of Islamic contracts, are permissible government would pay 2 percent subsidy. provided that they are financed by the government subsidy or administered funds. The minimum expected lending rate on According to the 4th Plan, at least 25 percent facilities extended for participatory contracts of the facilities extended by all banks shall by banks (both public and private) and credit be allocated to water and agriculture sector, institutions was determined at the rates set for and the rise in outstanding scheduled transaction contracts. Furthermore, the real facilities shall be reduced by 20 percent per profit rates of participatory contracts would annum, on average, during this Plan, when be determined at the end of the period. compared with the approved figure for 1383. Furthermore, the government is obliged to The provisional profit rate of term decrease its indebtedness to Central Bank investment deposits with banks and credit and banks through inclusion of the repay- institutions was set within a range of 9 per- cent for ordinary short-term to 19 percent for ment amounts in annual budgets. Based on 1 the quantitative targets of the 4th FYDP, five-year deposits . Moreover, declaration the average rate of inflation and liquidity of provisional deposit rates in excess of the growth are determined at 9.9 and 20 percent, ones approved by the CBI depends on respectively, during this Plan. Thus, infla- presentation of the feasibility reports of the tion rate and liquidity growth for the fourth underlying projects and approval of the CBI. year of the 4th Plan are set at 7.9 and 18.0 1 percent, respectively. The provisional profit rates of term investment deposits according to the type of deposits are mentioned in the respective table. 89 MONETARY AND BANKING POLICY Chapter 14 AND PERFORMANCE The commission of the contracts is set at For better allocation of credits and attain- a maximum of 3 percent, and banks are ment of a balanced growth, the extending of authorized to reduce this rate and improve new loans and facilities to economic sectors the quality of banking services. was set as follows: agriculture, water, and processing industries 25 percent; manufacturing In order to provide an appropriate instru- and mining 33 percent; construction and ment for public daily transactions and to housing 20 percent; trade and services 15 reduce the effects of abundant liquidity percent; and exports 7 percent. Moreover, to resulting from issuance of interbank checks, attain a balanced growth and alleviate regional according to the Cabinet approval, since disparities, Central Bank, in coordination Ordibehesht 1387, Iran-Checks are solely with the Ministry of Economic Affairs and issued by the CBI and the printing costs will Finance, Ministry of Labor and Social be paid by the Central Bank. The CBI will Affairs, as well as President Deputy for receive the 100 percent rial equivalent of the Strategic Planning and Control, will declare mentioned checks from commercial and shares of provinces in credit allocation to specialized banks. banks. In order to increase share of banks' long- term deposits and strengthen sustainability According to CBI monetary policy and of these deposits, the reserve requirement supervisory guidelines, the use of overdraft ratios of banks were determined based on facilities of CBI by banks is restricted to the type of deposits1 as follows: current and resolving short-term liquidity positions by others 20 percent, Gharz-al-hasaneh 10 banks based on banks' provision of liquidity percent, short-term and one-year 17 percent, forecasts. The CBI will regulate and control two- and three-year 15 percent, four-year 13 banks' use of overdraft facilities through percent, and five-year 11 percent. Moreover, both price mechanisms and quantitative the excess reserves of the banks, after quotas. Banks are subject to 34 percent per lowering the different reserve requirements annum penalty rate on using CBI overdraft of banks, will be used in priority order for facilities if these facilities pass certain threshold the purpose of banks' debt payment to the which is administered as a percentage of CBI, loan for productive and investment their savings deposits. Moreover, banks are projects and loan for working capital of prohibited from making any excess financial production units. obligations beyond the financial resources that they mobilize and acquire from the Banking facilities, with the exception of market. Banks should not rely on CBI facilities extended by Bank Maskan's Savings overdraft in their lending operations. Fund and those allocated for low-income groups by other banks, shall not be extended Banks receive Gharz-al-hasaneh deposits for the purchase of housing units, both the and extend Gharz-al-hasaneh loans worth site and the superstructure. The maximum Rls. 100 million per applicant for procurement loan facility and commitment for projects is of essential needs. The commission received set at Rls. 250 million (up to 70 percent of by banks shall be a maximum of 3 percent the estimated price) per residential unit for per annum to finance the costs incurred by the duration of project execution. rendering services and rewarding depositors. 1 Previously, the reserve requirement ratios of deposits held Banks are solely authorized to utilize with commercial and specialized banks were determined at 17 and 10 percent, respectively, while that of Bank Maskan's Gharz-al-hasaneh deposits for Gharz-al- Savings Fund was set at 2 percent. hasaneh facilities; therefore allocation of 90 ECONOMIC REPORT AND BALANCE SHEET 1387 such deposits for investment purposes shall in assets were the rise in other assets of be prohibited. banks by 26.9 percent (Rls. 255,732.7 billion) and increase in non-public sector indebtedness According to paragraph (h), Article 10, by 12.2 percent (Rls. 202,825.2 billion). On 4th Plan Law, issuance of participation the liabilities side of the banking system, the papers by the Central Bank needs Parliament rise in liquidity by 15.9 percent (Rls. 261,073.0 approval. Considering the limitations imposed billion) was the major contributing factor to on due implementation of open market banks' liabilities growth. operation of CBI by this Article, amendment of this provision and authorization of the CBI with regard to decision making on Figure 14.1. Major economic variables issuance of participation papers were deemed necessary. Thus, the change of authorization (percentage change) for the issuance of participation papers from GDP inflation (1383=100) Parliament to CBI was proposed and approved liquidity by Parliament on Aban 22, 1387 session. 40 This legislation was also approved by the Guardian Council. According to this legislation, 30 the MCC was designated as the authorized entity to give approval for the issuance of 20 participation papers within the framework 10 and principles of the Law for Usury (Interest) Free Banking approved in 1362 0 and on the occasions when the CBI deems it 1383 1384 1385 1386 1387 necessary to issue the papers for liquidity control and monetary policy purposes. Banking System and the External Sector In light of issuance of CBI Iran-Checks, In the review year, net foreign assets of and banks' and credit institutions' obligation the banking system picked up by 28.4 percent to purchase these Checks, and in order to (Rls. 133,471.4 billion) to Rls. 604,250.9 encourage banks and credit institutions to billion. This was mostly owing to the rise in supply money to the public; Central Bank, the net foreign assets of the CBI, and that of according to Circular No. MB/2412 dated banks and credit institutions by respectively Shahrivar 28, 1387, authorized banks and Rls. 124,033.5 billion and Rls. 9,437.9 billion. credit institutions to hold up to 2 percentage Frequent withdrawals from the OSF and points of their required reserves in cash foreign exchange purchases from the govern- (including notes, coins, and CBI Iran-Checks). ment, based on the budget law, which were partly sold in the market mostly contributed 1 to increase in Central Bank's net foreign Banking System Performance assets. Reduction of banks' and credit Banking system assets and liabilities institutions' foreign exchange loans and increased by 12.3 percent to Rls. 4,582,488.0 deposits worth Rls. 8,861.9 billion raised billion. The major factors behind the increase their net foreign assets. 1 Banking system includes Central Bank,